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Thursday, June 16, 2011

Canadian top banker warns condo bubble will burst

CANADA - Its not very often that a top banker says the sky is falling, so when the Bank of Canada Governor Mark Carney starts warning of a housing price bubble, particularly in big city condo markets, that is a signal that many Canadians should be worried about buying a condo in the near future... or else you might get burned on the price.

Once interest rates rise to normal levels (right now they're in recession/recovery mode) the higher interest rates could (and probably should) cause the condo bubble to burst. This will be good news if you want to buy a condo after the bubble bursts. Bad news if you're trying to sell and don't want it to burst right away.

In a speech in Vancouver, Mark Carney said the overheated housing market is in danger of taking of “expectations” overtaking the normal workings of supply and demand.

He says “the classic market emotions of greed and fear—greed among speculators and investors and fear among households that getting a foot on the property ladder is a now-or-never proposition.”

Mark Carney suggested that an expected cooling off of the economy may take some steam out of real estate, and that heavily indebted Canadian households are at risk of suffering financially when interest rates rise above today’s unusually low levels due to the recession. Thus when the economy recovers some people may end up losing their shirts when condo prices collapse.

Mark Carney notes that Canadians are now as deeply in debt (relative to their income) as consumers in the United States and Britain, which both suffered a financial meltdown in 2008 and 2009. Canada has yet to get hit by its share of the housing market meltdown, something which hasn't happened in Canada since the 1980s.

“The Bank estimates that the proportion of Canadian households that would be highly vulnerable to an adverse economic shock has risen to its highest level in nine years,” says Carney.

Mark Carney believes it was appropriate for the central bank to keep its influential overnight interest rate at historically low levels since early 2009 to spur business activity and speed economic recovery. But low interest rates “even if appropriate. . . .create their own risks.”

Canada “should not be lulled into a false sense of security by current low rates,” says Carney, who also says that Canadian “households will need to be prudent in their borrowing, recognizing that over the life of a mortgage, interest rates will often be much higher.”

The Bank of Canada governor has been warning for two years that many overexposed households will face a rude awakening when interest rates go up. In the latest decision on May 31, the bank maintained the rate at 1%.